Federal Circuit Affirms Decision to Vacate Judgment Following Evidence of Fraud

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On May 5, in Cap Export, LLC v. Zinus, Inc., the Federal Circuit held that a district court properly vacated its earlier judgment of infringement in favor of Zinus after evidence came to light that Zinus’s president gave false deposition testimony. The decision offers useful insight into the Federal Circuit’s views on Federal Rule of Civil Procedure 60, which provides grounds for relief—such as vacating a final judgment—for fraud, misrepresentation, or misconduct by an opposing party.

Zinus is the owner of a patent directed to bed frames that can be shipped in a compact form with all of the frame components such as the footboard and side supports packed into a compartment in the headboard. Accused infringer Cap Export deposed Zinus’s president, who was also its testifying technical expert, about his knowledge of alleged prior art beds. He testified that he had never seen a bed shipped disassembled in one box before the filing date of the patent.

Relying in part on this evidence, the district court granted partial summary judgment for Zinus that the patent was not invalid in light of the prior art of record. The parties stipulated to the entry of a final judgment in favor of Zinus for infringement, $1.1 million in damages, and a permanent injunction against Cap Export.

Less than a month later, in another lawsuit that Zinus had filed, a defendant produced invoices for the purchase of disassembled beds shipped with components packed inside the headboard predating the filing date of the Zinus’s patent. When Cap Export learned of this evidence, its further investigation revealed that these invoices were for sales to Zinus and signed by the same president and expert who denied that he had seen such beds before the filing date of the patent.

Cap Export filed a motion to vacate the judgment under Rule 60(b)(3), alleging fraud and misrepresentation based on the deposition testimony. The district court granted the motion, finding that the invoices were for beds functionally identical to the claims in the patent, and that the deposition testimony constituted an affirmative misrepresentation regarding the witness’s knowledge of prior art bed frames shipped disassembled in a single box with components stored in the headboard.

In an approach that the Federal Circuit dubbed “blame the victim,” Zinus appealed, arguing that Cap Export’s “incompetent lawyers” would have discovered the emails relating to the purchase invoices had they exercised due diligence and propounded standard document production requests. Under Ninth Circuit law, Rule 60(b)(3) requires that the fraud not be discoverable by due diligence before or during the proceedings. Although the Federal Circuit began by characterizing the Ninth Circuit’s additional due diligence requirement as “questionable,” contrary to Rule 60, and without support in any other circuits, it nevertheless followed it because procedural issues require application of regional circuit law.

In addressing the question of what level of due diligence was required, the Federal Circuit looked to Ninth Circuit law and reasoned that due diligence in discovering fraud does not require investigation unless there is a reason to suspect fraud. According to the court, the record in this case offered no reason to suspect that the testimony of Zinus’s president and expert was fraudulent. He repeatedly misrepresented his knowledge of the relevant bed designs and Cap Export undertook numerous prior art searches that failed to uncover evidence of the purchase invoices. Also, the evidence that he concealed by his testimony was not widely available, a matter of public record, or information already in Cap Export’s possession.

The Federal Circuit affirmed, finding that Zinus’s witness misrepresented his knowledge of highly material prior art, and that the district court properly declined to condone such conduct by vacating the judgment under Rule 60(b)(3).

An interesting aspect of the decision is in its conclusion, in which the Federal Circuit emphasized that “[t]he functioning of the patent system requires that everything that tends to a full and fair determination of the matters in controversy should be placed before the court.” The court stated that “[t]he far-reaching social and economic consequences of a patent . . . give the public a paramount interest in seeing that patent monopolies spring from backgrounds free from fraud or other inequitable conduct and that such monopolies are kept within their legitimate scope.” The court’s policy statement seems to be directed at plugging the apparent loophole that Ninth Circuit law left open by layering a diligence requirement on Rule 60. Moreover, it is clear from the opinion that Zinus’s “blame the victim” approach failed to garner much sympathy from the court, as it was not inclined to allow Zinus to get away with misrepresenting the truth by hiding behind the Ninth Circuit’s due diligence shield.

The court’s decision may have future implications in other fraud-based defenses such as fraudulent procurement of a patent or trademark, where the fraud is not discovered until after the case concludes. With the possible exception of cases governed by Ninth Circuit law, owners of patents or trademarks should not expect to be able to fend off a motion to set aside a judgment under Rule 60 based on later-discovered fraud by asserting that the challenger failed to exercise due diligence in discovering the fraud.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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